Three-month stock rally fuels hope of economic improvement

Steve Adams

Tuesday

Jun 23, 2009 at 12:01 AMJun 23, 2009 at 10:13 PM

People who kept their money in stocks and mutual funds are feeling a little better these days. But more volatility and downturns are expected before a sustained stock market rally, investment advisers say. (Are you ready to dive back in? Open the story to take our poll.)

People who kept their money in stocks and mutual funds are feeling a little better these days.

Whether it’s your IRA or a pension fund that invests millions of dollars at a time, they have benefited from a three-month rally on Wall Street.

There are also some signs the good news may go further than the stock market. The pace of new layoffs is slowing down, and some economists think consumers are ready to make big-ticket purchases they had been delaying.

Since March 9, the Dow Jones Industrial Average has risen more than 25 percent, while the Standard & Poor’s 500 index has risen more than 30 percent.

Still, financial advisers say volatility and occasional downturns will likely be part of this recovery pattern, as evidenced by Monday’s 200-point drop in the Dow and last week’s broad decline in stock prices.

Dan Heitzman, a financial planner and founder of StoneBridge Financial in Rockland, predicts an up-and-down market for much of the summer before a revival by year’s end.

“We’re closer to the end of this than we are to the beginning,” Heitzman said.

Michael O’Callaghan, president of Harvest Financial Services in Braintree, expects more investors to jump back into equities after having seen the gains of recent months.

“I wouldn’t call it optimism. I would call it a fear of missing the (upswing),” O’Callaghan said. “I still think we’ll finish positive for the year, but I don’t think we’ll hit 10,000 (for the Dow).”

There have been encouraging signs in the job market. The number of people receiving unemployment benefits fell for the first time since January, according to a U.S. Labor Department report released this past week.

Pent-up demand for big-ticket items could boost the retail and automotive sectors, as consumers look to replace aging products.

As always in stocks, however, there are no sure bets. Various economic indicators could spook investors and send shares tumbling.

Mortgage rates have been rising from historic lows, and future interest rate hikes could delay a rebound in housing and related sectors. A rise in energy prices could crimp consumer spending, which accounts for two-thirds of all economic activity.

Markets appeared to bottom out in March as investors decided that the worst of the economic meltdown was behind them.

“A lot of people just realized the world wasn’t going to come to an end, and we weren’t going to be in a Depression,” said Richard Gilman, a financial planner for Securitas Financial Group in Hingham. “Some people began to see some great buying opportunities.”

Large-cap stocks offer some of the best opportunities, Heitzman said. Typically, smaller-cap stocks lead the market out of a recession, but with credit markets still stingy, big companies will have the first shot at obtaining capital, he said.

Herd investor psychology could propel the Dow near the 10,000 mark rapidly if signs point to a sustained rally, Heitzman said, but because stocks are a leading indicator of economic activity, improvement on the jobs front may not materialize before 2010.